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Appalachian Winter: Death of a Community Bank

In May 2006, Appalachian Bancshares was ranked as one of the best performing public companies in Georgia, while trade magazine US Banker named it one of the top 200 community banks in the nation. Today, the company is heading for the hills.

The $1.2 billion-asset banking company said in a regulatory filing this week that "there is substantial doubt about its ability to continue as a going concern," citing rising losses and a shortage of capital.

Appalachian's gradual disintegration is far more typical of the banking crisis than the kind of sudden cardiac arrest associated with, say, Lehman Brothers or Washington Mutual. And its real estate-fueled rise and fall both reflects the previous era and prefigures what's to come.

Formed in 1994, Appalachian grew quickly over the ensuing years. It built branches, even launching a federally chartered thrift, and expanded into neighboring states. With real estate booming in North Georgia, along with the rest of the Southeast, the company pushed hard into residential construction and commercial lending.

By the fall of 2005, Appalachian felt ready for the big time, moving its stock from an over-the-counter exchange to the Nasdaq. Its shares would peak the following year at nearly $25 a share. Then the levee started leaking.

New home sales in the Southeast topped out in late 2005, and delinquency rates on construction and development rates started inching up. After for years averaging less than 1 percent, from late 2006 through late 2007 these rates rose to 5.3 percent. By the end of 2008, they had soared to more than 13 percent, while banks had written off more than 6 percent of these loans.

Appalachian was soon swamped. Like many smaller banks, its business leaned heavily on lending to local companies, as well as individuals. By June 2007, 53 percent of its loans were tied to commercial real estate. The company took evasive maneuvers, but not quickly enough. Besides, its options were limited -- as of year-end 2008, nearly 88 percent its loans were secured by real estate, with those loans making up three-quarters of Appalachian's total assets.

The economic recession slammed into Georgia particularly hard. The state leads the nation in bank failures, with 21 institutions going under as consumers fell behind or defaulted on their loans. Although the deluge has done particular damage to banks in the Atlanta metropolitan area, these larger institutions are mostly weathering the storm. By contrast, smaller players like Appalachian, lacking ample capital reserves and a healthy mix of revenues, are taking a beating.

This spring, bank regulators ordered Appalachian to boost its capital reserves and reduce its exposure to toxic loans. Although the company has sought to comply, its financial condition has continued to degrade, making that virtually impossible. Appalachian's rate of nonperforming loans has soared to more than 15 percent, up sharply from 3.1 percent in December. Net interest income, the bank's main source of revenue, plunged 49 percent over the first half of 2009.

This is how banks expire. Although it's sport these days to villify bankers, the fact is that most smaller institutions have few levers to pull given the scale of the housing crisis. Many more such institutions will collapse as tighter mortgage markets make existing and new homes hard to sell and weak credit conditions deter banks from taking risks.

Appalachian was a good bank -- profitable and, to the extent that was possible, prudent. These days that often isn't enough.

Chart courtesy of Federal Reserve Bank of Atlanta